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Thursday, 5 March 2015

Thumbs up for Pak Islamic banking

ISLAMABAD: An IMF working paper has supported the Islamic banking system, found it a better performer during financial panics and suggested that greater financial inclusion of faith-based groups may enhance the stability of the banking sector.

In its latest study “Are Islamic Banks More Resilient during Financial Panics?”, an IMF working paper focused on the Islamic banking data of instance through Islamic banking, may enhance the banking system’s stability.

Impressed by the Islamic banking system, the IMF study even recommended that some features of Islamic banking may be considered for adaptation and adoption in the conventional banking.

“One such feature is equity like profit and loss sharing savings accounts. Such savings accounts not only provide an additional cushion to banks capital but also to some extent do away with the ‘private gains – public pains phenomenon, by sharing both the profits and losses with depositors,” the study said.

The study says that rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims.

“Using data from Pakistan, where Islamic and conventional banks co-exist, we compare these banks during a financial panic. Our results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics,” it said.

The IMF study shows that the Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding.

The study also reveals that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. It adds, “Our results indicate that Islamic banking branches appear far better than their conventional parent, which is inconsistent with the literature that suggests a negative role of parent bank fragility on the lending of subsidiary.

“We show that Islamic banks were more likely to grant new loans during the financial panic and that their lending decisions were less sensitive to changes in deposits in comparison with their conventional counterparts. Thus the transmission of financial shocks to the real economy may also be partially dampened if faith-based financial institutions are in operation (in a Muslim majority country in this case). Resultantly, financial stability may be improved by the religion inspired or otherwise altruistic objectives pursued by a set of bank managers and/or their clients,” the IMF study says.